Secular Stagnation in an Economy with Land

Abstract

I present a model of secular stagnation with land and infinitely-lived agents with wealth preferences. Land is the prime example of a non-producible productive asset and rules out a negative real interest rate in steady state. With standard wealth preferences, higher land prices stimulate consumption and full employment is always feasible in steady state unless the central bank follows a deflationary policy. In contrast, secular stagnation emerges as the unique equilibrium of the monetary economy if wealth preferences are insatiable. In contrast to conventional wisdom, it is very existence of land itself that prevents full employment from being feasible in this case. Increases in the inflation target are no longer effective in restoring full employment as stagnation is a real phenomenon. These conclusions hold if households require a risk premium on land. Then, a higher risk premium can restore full employment when wealth preferences are insatiable.